Source: Google

The leading food delivery platform, Zomato had raised around USD 550 mn from anchor investors ahead of its initial share sale. The company allocated 5,52,173,505 equity shares to anchor investors for Rs 76 apiece. The anchor investors included BlackRock, Tiger Global Investments Fund, Fidelity, New World Fund Inc, JP Morgan, Morgan Stanley Asia, Goldman Sachs, T Rowe Price, Canada Pension Plan Investment Board (CPPIB), Government of Singapore, Monetary Authority of Singapore and Abu Dhabi Investment Authority (ADIA).

Zomato and other e-commerce players from Emerging Markets

Zomato IPO has drawn sharp reactions among the investors. While the supporters claim that Zomato is a category creator and right now the focus should be on market dominance and it is only a matter of time before financials will start looking better on profitability, the critics say that it is only a cash guzzling machine and the moment external funding support stops, the business which is already unsustainable will stop growing.

We think it is important to also look at the context. The e-commerce start-ups from emerging markets have a very long runway ahead of them for growth. This makes them a prime target for global investors looking for growth and when companies like Amazon trade at stratospheric valuations, the e-commerce companies from emerging markets won’t also be left behind. This is all good and supports the view that Zomato may do well.

However, it is also important to see that apart from market dominance, how these companies fare on two important parameters: a) how sticky the customer is, and, b) how deep is the ‘technology’ moat? In this EMAlpha insight, we look at how some of the e-commerce companies from the other emerging markets have been doing and if there was any impact of Zomato on them. The global investors are agile and investing opportunities in one market affect others for sure.

Interestingly, some of the brokers were pushing Zomato by highlighting that Zomato’s higher valuation multiples need to be seen in the context of higher growth. In e-commerce, emerging market platforms such as Sea, MELI, and Allegro trade at a premium to Chinese and developed market peers due to superior growth rates. Let’s begin with Allegro, which is one of the leading e-commerce trading companies in Poland.

Allegro: The Amazon of Poland

Allegro was founded in 1999 and today, the Allegro platform is one of the most trusted online Polish marketplaces. According to the report “E-commerce in Poland 2019” conducted by Gemius, 80% of respondents identified the Allegro platform as their preferred brand in the e-commerce industry. There is a massive opportunity for Allegro to grow because it is the market leader by a significant margin in an industry that is still underpenetrated.

While Allegro has taken a hit starting around the same time Zomato got listed despite an excellent result, there is not much of an impact on Sea Ltd and MELI. But there are always local and global developments that impact the stock price and the question is, how can this be incorporated into investment decisions? But first, can the local and global news flow analysis pick up issues efficiently?

For example, in the local media, the build-up before the Zomato IPO was an indication that there would be strong demand resulting in good enough listing gains. It was possible that the listing gains would be followed by underperformance. So far, this has not happened. But it is too early to take a final call on this. It is too early to say will Zomato mirror Allegro or Sea Ltd/MELI.

The other issue is that can regular analysis of social media be used as input before taking an investment decision? If yes, then how to do it in the most efficient manner? It is here that EMAlpha’s analysis of unstructured data becomes a much-needed tool for investors. The following are four major components wherein EMAlpha can aid investors.

• The local language along with English news analysis can be tracked for companies experiencing increased competition. Considering the sensitivities involved, these issues could escalate quickly, thus impacting the stock price performance.
• The unstructured data analysis in other geographies can also be used to assess the potential impact on some of the larger companies. A case in point being Amazon in Poland which is very similar to the impact it had on Flipkart in India.
• Predicting the behavior of large institutional investors can help forecast the stock price impact. This is one of the key features of the EMAlpha product as it combines technology with domain expertise. There are cases when fears are unfounded and that creates opportunity.
• The social media analysis provided by EMAlpha is useful in picking up the signals when the views change for retail investors as compared to the stand of institutional investors. In many cases across markets, this plays a crucial role.

It is pertinent to add here that the changes in perception on ESG track record of a company and reactions from institutional investors have become an important driver of stock prices and especially in cases where the volatility is high, it matters even more. The EMAlpha sentiment and ESG scores have been reasonably accurate and there is a strong link between stock price performance and these scores. This is helpful for asset managers in their decision-making.